Crown Castle Inc. (CCI, Financial) is a leading provider of shared communications infrastructure in the U.S. As a real estate investment trust, the company owns an impressive portfolio of over 40,000 towers across the country. Additionally, the company operates approximately 120,000 small cells in high-demand areas and boasts around 85,000 miles of fiber. These cutting-edge assets support small cells and fiber solutions, forming a nationwide portfolio of essential communications infrastructure.
Through this extensive network, Crown Castle facilitates the seamless connection of cities and communities, enabling access to vital data, technology and wireless services. The company’s unmatched portfolio of towers solidifies its position as a key player in the telecommunications industry in this transformative era.
Financial performance and future projections
Crown Castle's second-quarter financial results exceeded expectations, highlighting the long-term opportunities in the 5G deployment market in the U.S. The company reported a significant 10% year-over-year growth in site rental revenue to $1.72 billion, or an increase of $161 million compared to the prior-year quarter. This growth includes approximately $155 million from organic contribution to site rental billings, despite a $30 million decrease in straight-lined revenue and a $36 million increase in amortization of prepaid rent.
Notably, the site rental revenue also benefited from a $100 million net contribution from lease cancellations linked to the T-Mobile and Sprint network consolidation. Out of this contribution, $97 million came from small cells and $3 million from fiber solutions. Additionally, the revenue included $57 million in accelerated prepaid rent amortization related to small cells.
Looking ahead, Crown Castle anticipates lower tower activity for the remainder of the year due to carriers reducing network spending. According to Dell'Oro Group, the telecom industry is on the cusp of a substantial change in spending and capital expenditure trends. Their findings indicate an imminent decoupling of telecom spending, hinting at a more intricate path for the global telecommunications landscape.
The overall capital expenditure is expected decline following a general downward trend with a negative compounded annual growth rate of 2% to 3% over the next three years. As a result, the company expects contribution from services to decrease, impacting the full-year outlook. However, the company emphasized that its long-term leasing agreements with customers will mitigate the impact on site rental revenue. Further, wireline and wireless telecom equipment spending remains positive with Dell'Oro Group anticipating a 1% year-over-year increase in 2023.
Growth strategy and financial stability
Despite the challenges posed by reduced tower activity, Crown Castle remains optimistic about its core business growth in 2023. The company projects a 5% organic growth in towers, deployment of 10,000 small cell nodes and a return to 3% fiber solutions growth by the end of the year. The company's confidence in its long-term prospects is supported by the significant mobile data demand increase in the U.S., which is expected to drive continued growth in its core business.
Further Crown Castle anticipates double-digit annual revenue growth in its small cell business over the next few years, supported by an existing backlog of 60,000 nodes. This growth is instrumental in the company's target to achieve long-term annual dividend growth of 7% to 8% beyond 2025.
To maintain financial strength and flexibility, Crown Castle strategically issued $1.35 billion of long-term fixed-rate debt in the second quarter, securing a weighted average interest rate of approximately 5%. As a result, by the end of the second quarter, over 90% of the company’s debt was fixed-rate with an average maturity of eight years, and only 7% of its debt is maturing through 2024. The company boasts over $6 billion of available liquidity under its revolving credit facility. The company remains sufficiently liquidated to survive the short-term challenges faced by the industry.
Industry outlook and 5G adoption
The future of wireless usage appears exceptionally promising, with Ericsson's projections indicating global monthly average use per smartphone will reach 47 gigabytes by the end of 2028 from 20 GB in 2023. By the end of 2023, 1.5 billion 5G subscriptions are expected worldwide, and North America stands out as a frontrunner with the highest subscription penetration at 41% by the end of 2022. This trend is set to continue, with more than 250 million additional 5G subscriptions projected for 2023.
The enterprise segment is also witnessing significant adoption of 5G, with wireless wide area networks serving branch office locations and mobile professionals. Looking ahead to 2028, an astonishing 410 million 5G subscriptions are predicted, accounting for over 90% of all mobile subscriptions. North America is forecast to lead the way with a remarkable 91% 5G penetration, followed closely by Western Europe at 88%. With such remarkable growth projections, 5G subscriptions are anticipated to reach an impressive 4.6 billion globally by the end of 2028, constituting over 50% of all mobile subscriptions. As a result, 5G will establish itself as the dominant mobile access technology by subscriptions in 2028.
5G technology and the smartphone market
Despite challenges in the overall smartphone market, the adoption of 5G technology remains robust. Notably, the high-end segment has displayed resilience, with global market leaders outperforming the average. While smartphone shipments experienced a double-digit decline in the fourth quarter of 2022, shipments are projected to recover in the second half of 2023. The proliferation of 5G smartphones is a key driver in this trend, with over 870 models launched so far and more than 80 expected in 2023. By the end of the year, 5G smartphones are projected to constitute a significant 62% of all smartphones shipped.
Fixed wireless access over 5G
Ericsson also reported that although foldable devices saw a noteworthy 26% growth in shipments in 2022, they still represent a modest 1% of the smartphone market. In contrast, fixed wireless access over 5G has gained considerable traction. Over 40% of FWA service providers, totaling more than 100, now offer this service over 5G. North America and Western Europe lead the regional adoption with close to 70% of FWA service providers providing it over 5G.
Looking ahead to 2028, the number of FWA connections worldwide is projected to surge from 100 million at the end of 2022 to an impressive 300 million. This will account for approximately 17% of all fixed broadband connections. Of these projected FWA connections, nearly 80% are expected to be enabled by 5G technology.
This data indicates that, despite the challenges faced in the smartphone market, the rise of 5G adoption and the increasing prevalence of fixed wireless access over 5G will play a significant role in shaping the future of mobile communication and connectivity. As 5G continues to drive innovation and reshape the telecommunications industry, its widespread adoption is poised to transform the way people and businesses access and utilize data, creating new opportunities and possibilities in the digital landscape.
Crown Castle's market position
As wireless connectivity continues to play an increasingly crucial role in today’s high-tech world, Crown Castle stands to benefit substantially due to its strategic position in the market. One of the company's key strengths lies in its built-in growth through existing customer contracts with major players in the telecommunications industry. This strategic positioning allows the company to thrive in the ever-expanding wireless connectivity market.
Conclusion
The rapid growth of 5G mobile subscriptions is undeniably transforming the global telecommunications landscape, ushering in a new era of connectivity and innovation. As a key player in this transformative industry, Crown Castle stands out as one of the biggest winners.
The company's strategic position and extensive infrastructure have placed it in a favorable position to capitalize on the industry's evolution and meet the surging demand for wireless communication assets. At an adjusted funds from operations multiple of 14, Crown Castle seems fairly valued with a dividend that yields almost 6%.
